Net's future a taxing issue for lawmakers

A federal commission is considering whether to ask Congress to impose a simplified sales tax structure on e-commerce, leveling the playing field for brick-and-mortar stores. Some observers believe the 19-member panel is no longer concerned about whether to tax the Internet, just how to do it.

Nonetheless, with such a complex issue involving so many competing interests, anything can happen, says ICSC Chairman William McCabe.

* "I'm hopeful from what I'm hearing," McCabe says. "Many of the people who operate retail websites are saying that a sales tax is not a difficult thing for them to deal with. I think they're concerned about other taxes that could be imposed on them."

* Internet retailers became exempt from state and local taxes last year with passage of the Internet Tax Freedom Act. The moratorium, which expires in October 2001, was designed to help e-commerce grow while giving Congress more time to consider Internet tax issues.

The mail-order model? In September in New York City, the Advisory Commission on Electronic Commerce conducted the second of four two-day public hearings scheduled for the fact-finding portion of its mission. The third meeting will be in December in San Francisco; the fourth will be in March in Dallas.

At the September meeting, the commission voted to ask state tax collectors and other groups to find ways to simplify existing tax laws. All sides agree that the current system for collecting taxes on mail-order businesses is too cumbersome for cyberspace. Under that system, thousands of state and local governments levy a variety of sales tax rates. Mail-order retailers must sort through the confusion by developing detailed ZIP code maps, which can be tricky considering that single ZIP codes sometimes contain multiple sales tax rates.

"Simplification is kind of the centerpiece of this whole discussion, both with the rates and the administration of the tax," says Ralph Tabor, who monitors the commission's work for the National Association of Counties. "These tax proposals could be presented by anybody. But specifically, the state tax administrators are working with the governors. About 30 states are involved in this effort, working together and locally."

Tabor says the most feasible approach would be to follow the basics of current mail-order guidelines, which require buyers to pay the tax rate applicable in the area to which goods are sent.

"It appears at this point that there are a number of representatives of business on the commission, along with four or five of the government people, who are supporting a recommendation that there be fair and equitable taxation," Tabor says. "I think that's probably where we're headed right now. But at the same time, I think it's premature to say what's going to happen."

State and local government groups have been working hand-in-hand on the issue with ICSC. According to the National Governors' Association, sales taxes account for as much as 40% of all state revenues; sales and use taxes are the single largest source of revenue for all state and local governments, amounting to $189 billion in 1998. The government associations argue that public funds will dwindle if e-commerce grows at present levels without being subject to sales taxes.

Meanwhile, the shopping center industry, which according to ICSC paid $43 billion in sales taxes in 1998, would face what it calls unfair competition. "We're looking at merely maintaining a level playing field," McCabe says.

Hearing from all sides? In setting up the advisory commission, the legislation required that representatives be included from small businesses, consumer groups, telecommunications carriers, e-commerce companies, local retailers, and federal, state and local government agencies.

ICSC, in a white paper published earlier this year, criticized the final make-up of the commission for its "glaring omission" of brick-and-mortar retailers.

"As it now stands, the business representatives on this commission are comprised solely of executives from Internet companies such as Time Warner, MCI Worldcom, America Online, AT&T and Gateway," the paper reads. "It is inconceivable that this group could fairly debate and recommend tax policy on Internet retail transactions without a retail representative."

Wayne Mehlman, director of economic issues for ICSC, says few brick-and-mortar retailers have spoken before the commission thus far, although ICSC filed a formal request in August and hopes to address the commissioners at one or both of the upcoming meetings.

Competing interests Many other interests are working to shape the debate. Representatives of telecommunications companies have argued for a simpler tax structure and lobbied against Internet access fees; online companies naturally want the Internet to remain untaxed, as do small business groups such as the 50,000-member Small Business Survival Committee, based in Washington, D.C.

"The Internet presents tremendous opportunities for entrepreneurs and small businesses," says Raymond Keating, the group's chief economist, who addressed the commission in September. "It enables the little guy to compete more easily with the big guy."

Some lawmakers also have spoken out against Internet taxes. House Republican leaders sent commissioners a letter in September reminding them that their role is to determine if the Internet should be taxed, not to focus on finding the best way to tax it.

"There are many members (of Congress) that will oppose any new taxes on the Internet," the letter reads in part. One bill already is circulating that would permanently eliminate Internet taxes. Others are expected to follow.

Although the commission is required to issue its final recommendations in April 2000, much work remains to be done, and some say the deadline should be extended. But Joseph Crosby, who advises Wal-Mart, Sears and other major retailers for Ernst & Young LLP in Washington, D.C., says it's unlikely the commission will ask for more time.

Crosby reminds retailers that the panel is merely formulating recommendations and that Congress will make the final decision. Although the current perception is that a majority of commissioners favor a simplified sales tax, there are no guarantees, he says.

Even the chairman of the commission, Virginia Governor James Gilmore, has expressed doubt that a consensus will be reached. A conservative anti-tax Republican, Gilmore also has said sales taxes might be out of place in the realm of e-commerce.

"The Internet is so new and exciting. We can't strangle it," McCabe says. "We should try to use it to our best advantage. There's no reason to believe that e-commerce is going to so negatively and dramatically affect retail that we should try to bury our heads in the sand."